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What is MDEF™ Investing? Strategy before tactics. Strategic investments dictate tactical actions in the Metals, Defense, Energy & Food sectors.

- Jeffrey C. Borneman

Brent Falls Below Survival Level - Upcoming OPEC Meeting Critical

Jeffrey C. Borneman | November 17, 2014

With benchmarks for crude oil at dire levels and predictions of even lower DEMAND for oil in 2015, OPEC's late-November meeting should be historic. The question OPEC members will wrestle with is how to cut supply (raise prices) without also cutting their market share?

The latest Energy news indicates that OPEC will announce a cut in production of approximately 1.5 million bbl/day to halt the downward price spiral. The interim measure is, to some degree, premised on the hope that either an economic uptick in China and US with increase DEMAND or, a geopolitical event will add an additional but substantial fear premium to the benchmarks, thereby saving various OPEC member's budgets. 

Throughout the slide in oil pricing, the Saudi's have adjusted both its pricing and supply to hold onto market share but other OPEC nations are not faring as well; less stable members (the latest is Iran) have had to dip into their sovereign wealth funds to service domestic needs. Similarly, over the weekend "Kuwait's cabinet and the country's Supreme Petroleum Council held an 'extraordinary' joint meeting Sunday to consider measures to stop the slide in prices" reports CNBC.

Investors have seen this dance many times in OPEC's short history. Falling prices, while a temporary boon to some, never end well for the consumer. Invariably, falling prices cause panic among producing nations (albeit some M&A, see today's news re HAL/BHI) but once stabilized, the price rises well beyond the previous mean. Should any geopolitical 'event' to the mix and what was considered a surplus of supply and low DEMAND becomes a scramble meet 'unexpected' higher DEMAND.

In this midst of all this seeming chaos, it is crucial for the investor to remember that Russia is the intended target of the Energy price decline. It is also of note that the sharp rise in the Defense sector coincides with the steep fall in Energy prices - this should surprise no one who studies this geopolitical chess game. 

China did come to Russia's assistance last week with a $58 billion Energy loan and the announcement of another Energy pipeline to China, but revenues to the Russian government are still falling along with its currency resulting in an Inflation cycle (eight percent as of last week) that makes some wonder how Putin held his temper at the G-20 over the weekend.

A host of prognosticators are calling for oil prices to fall to the $50/bbl level.  I can't but help to wonder if the individuals who make such calls understand state budgets, have studied human nature/history, and the design of the War machine.

Investor takeaway: Nothing happens without Energy. It is one of the trillion dollar markets and has the largest lobbying group known to man. Energy prices have fallen for a host of reasons but all are temporary. I'd rather clients invest in trillion dollar markets of crucial human need than clever tech-toys of fractional market value. The wise investor is an avid student of history and will recognize patterns that must, and will, repeat themselves.

If you want to know more about how the MDEF™ Investing strategy is positioned in this, or other geopolitical possibilities, please contact us directly.

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